Bernard is a house flipper in Picayune, MS. He finds an older property for sale and wants to rehab it and resell it for a profit. The property has a cost of $200,000 but he does not have the full amount so he obtains a hard money loan with West Star Finance Company. The loan-to-value (LTV) on the loan is 75%. This means that Bernard will bring 25% of the sales price to closing and the principle amount will be $150,000 on the note. The rate on the loan is 11% for a term of 18 months and the lender requires a five point origination fee at closing. The interest is to be paid monthly and the principle amount will be returned after the property sells.
Accordingly, Bernard will be required to make a $50,000 down payment in addition to paying a $7,500 origination fee. After the deal closes, he will pay the lender $1,375 in monthly interest payments, or 11% multiplied by $150,000 divided by 12 months in the year. At the expiration of the loan, he sells the renovated property for $260,000. After subtracting the $24,750 in interest expenses ($1,375 multiplied by 18 months), the $7,500 origination fee, the $150,000 principle amount on the loan, and the $50,000 he contributed to closing, he will make a gross profit of $27,750 ($260,000 price minus $232,250 in costs). This amount would then be reduced by any building costs paid out of pocket.